The Agency Holding Company Model Is NOT Dead — Just Challenged

After WPP’s poor financial showing in its latest results, much has been made of the imminent demise of Sir Martin’s agency conglomerate, and the ad agency holding company model in general.

Let’s be clear: there are a lot of pressures on that model.

First of all, the ANA reports on agency media and now production transparency has impacted and will continue to impact the bottom line of the agency holding companies. Media contracts have been renegotiated by most of the big advertisers.

This has happened “on the quiet,” as advertisers and agencies were both keen to keep these discussions out of the spotlight — since they had advertisers basically admitting they had not read and/or understood the finer details of what their agency contracts stated.

In other words, advertisers had not managed their fiscal responsibility for one of the largest expenses in any marketing-driven organization. And you don’t want that to play out in the open, for all of Wall Street and your shareholders to see.

The agencies had equal reason to negotiate quietly, since they had to admit that those contracts had little to do with their clients’ key interests — and everything with their own.

Most of the big advertisers have completed this process, but there are still many middle-sized marketers who are only now beginning “Project Clean-Up.” So the pressures on agency holding companies revenues will continue, but slowly taper off.

The second pressure point on the holding companies’ bottom line is the transfer of responsibilities from agencies to marketers in-house, or to independent white-labeled third parties. Think of programmatic, data management, marketing insights, etc. These are all areas which were highly profitable for agencies, because they either represented a high growth and/or high margin service. But advertisers, driven by technology available to them, are taking the reins of these services, cutting out the holding companies.

And third, there are the newcomers chipping away at agency holding company revenues. These are the likes of Accenture, Deloitte, IBM, but also Facebook and Google, and outsourced production companies. These are all service providers who are taking on responsibilities such as production, content development and distribution, etc., that were traditionally the domain of the agency holding companies.

So all of that hurts, and is now providing the perfect storm that is causing pain at the holding company level. As I’ve noted, this will most likely continue for a bit — and, more importantly, is irreversible.

However, to declare the agency holding model “dead” is a gross exaggeration. Rishad Tobaccowala, Publicis’ chief growth officer, famously likened holding companies to cockroaches: always able to find something to survive on.

I think this is true. As much as clients are changing the way they work and contract with,with agencies and their holding company parents, there will always be a need to outsource much of what is required to deploy marketing to the masses.

Advertisers often underestimate the amount of manpower and effort it takes to create the content and distribution output needed today. We all too often hear clients asking to “in-source everything” — only to learn that, actually, they can’t afford the required headcount or all of the tech needed to do it. Plus, they are headquartered somewhere in flyover country and the talent wants to live in New York. I am keen to see the next evolution of the cockroach.

by Maarten Albarda , Featured Contributor
Courtesy of mediapost